Rates and Ratios Tell a Story

Abstract

For a variety of reasons, economic performance varies both across economies around the world in any given year and over time for any given economy. The level of economic development, political and economic institutions, government policies, political stability, and other social and perhaps cultural factors may all contribute to these variations. These differences in economic performance and their underlying causes are often reflected in published economic statistics and can be highlighted through the use of rates and ratios. This case sets up an exercise for students to examine economic statistics by (1) analyzing some key rates and ratios and (2) matching the data to country profiles published in the CIA World Factbook. The countries included in this case are the United States, Germany, Japan, Brazil, Russia, India, and China.

Excerpt

UVA-BP-0510

Rev. May 7, 2012

Rates and Ratios Tell a Story

Economic performance varies for a variety of reasons both across economies around the world in any given year and over time for any given economy. One reason for the variation can be traced to the level of economic development for a particular economy in a particular time period. For example, developed economies rely more on high value-added industrial and services sectors to generate employment and income, whereas developing economies rely more on agriculture and natural resource extraction to generate employment and income. Residents in developed economies generally enjoy a higher standard of living than residents in developing economies. And because there is a lot of catching up to do (e.g., many “need” gaps in developing economies that require closing—infrastructure, critical services, and availability of consumer durables), developing economies, when they get their acts together, tend to experience faster economic growth than developed economies. As an economy matures and its residents reach a high standard of living, its growth rate tends to fall to the level experienced in other developed economies.

Another reason for some of the variations in economic performance between countries and over time is the result of economic policy. Some countries, as a matter of policy, are more open to international trade and international investment, whereas others put up more barriers to limit international trade (e.g., import duties) and international investment (e.g., limits on foreign investments). For countries that are more open, the growth in international trade and foreign investments can contribute significantly to economic growth.

A third reason for some of the variation in economic performance between countries and over time is the intensity of investment. Some economies, often rapidly growing developing economies, devote a large proportion of their GDP to investment—to build plants, purchase equipment, and construct bridges and highways—to increase the stock of capital available for the production of goods and services.

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Keywords: National income accounts, economic statistics, economic performance